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Emerging Markets

Managers see opportunity — and peril — in key emerging markets

Aberdeen Standard Investments’ Brett Diment

The sell-off in emerging markets debt, along with some specific stories, is making a few countries stand out for money managers.

Argentina — which grabbed headlines in recent weeks for its request of aid from the International Monetary Fund, a plunge in the value of the peso by more than 25% against the dollar and a rise in interest rates to 40% — was cited as one opportunity in particular.

"We see quite an orthodox response" from policymakers to Argentina's problems, said Brett Diment, head of emerging market debt at Aberdeen Standard Investments in London. "We see the weakness in Argentina as a bit of an opportunity."

However, "the big risk for Argentina is everyone has that position — it's a very owned position and that's been the big vulnerability," said Tim Ash, senior emerging markets sovereign strategist at BlueBay Asset Management LLP in London. "The big plus has been they have gone to the IMF very quickly ... are playing by the rules, which is encouraging," he said.

Other countries in Latin America are on money managers' watch lists. Mr. Ash said BlueBay likes Brazil, too. "It's a country with a pretty decent current account position and growth perspective," he said.

And Diana Kiluta Amoa, London-based emerging markets portfolio manager at J.P. Morgan Asset Management (JPM), said while Brazil is a market "we've liked for the better part of 18 to 24 months," current valuations and uncertainty related to upcoming elections mean her firm is "less involved in Brazil, (and we) have been taking back some of the positions there."

The same goes for Mexico, she said, where there is not enough premium baked into valuations to account for political uncertainty going forward.

South Africa, however, "is one we do like — we see a lot of value creation in South Africa on local and external debt. The story there is improving — we are seeing a government willing to implement reforms (it has been) talking about, fiscal consolidation playing out, (and) inflation should remain well within the central bank target range," Ms. Amoa said.

"With that sort of backdrop we think local rates look attractive ... for me when I look at the technical (picture, it is) much cleaner, valuations are more attractive and the fundamental story is improving — that's the sort of story we look for opportunities to get involved," she added.

On the less attractive side is Turkey.

Argentina and Turkey "could not be more different in terms of the policies and structural underpinnings," said L. Bryan Carter, head of emerging markets debt at BNP Paribas Asset Management in London. "For a while we have been negative on Turkey ... it looks unsustainable, and when (we) forecast structural balance of payments, we see nothing but deterioration," he said.

Mr. Diment said executives think there "is still unwillingness of policymakers to take the correct measures" in Turkey, inflation is rising and domestic financial conditions remain loose.

"We were reassured on Latin America and Argentina," said Vincent Mortier, Paris-based deputy chief investment officer at Amundi. "We are not reassured on Turkey. We are pretty alarmed on Turkey."